UK: Worry less about fiscal rules – Capital Economics

Sajid Javid’s abrupt departure as Chancellor of the Exchequer has generated plenty of discussion among economists about whether the UK’s fiscal rules are set to be torn up once again. The more interesting question, in the opinion of Capital Economics’ Chief Economist Neil Shearing,  is whether fiscal rules more generally continue to be of much value in today’s economy.

Key quotes

“One way to generate a more sustainable recovery in global economic growth would be for countries running budget and current account surpluses to loosen the purse strings. But as things stand, these countries are resisting stimulus measures. Instead, it’s the deficit countries – primarily the US and the UK – that are embracing fiscal support.”

“This increases fiscal imbalances between economies and means that deficit countries are likely to have less capacity to provide fiscal support when the next global downturn hits. This is a particular problem given that monetary policy is now operating at or close to its limits in many economies, meaning fiscal policy will have to shoulder the burden of support in the next downturn.”

“It’s not obvious that fiscal rules are required to serve their original purpose in a new world of low growth, low inflation and structurally low interest rates. (...) We should worry less about the precise formulation of fiscal rules and focus more on narrowing fiscal imbalances between countries. This would serve the global economy better over the long run.”